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EU reaches deal on banking union

By RAF CASERT and DAVID McHUGH Associated Press

Updated:
03/20/2014 10:37:26 AM EDT

BRUSSELS—The European Union has put in place the last building block of its banking union, a new system that aims to centralize oversight of banks and protect taxpayers from the cost of bailing them out.

After all-night negotiations lasting into Thursday, the EU's member states and the bloc's parliament broke a deadlock on how to set up a joint authority that can restructure or shut down failing banks.

The authority is a key part of banking union, a set of institutions and rules that hopes to keep any future bank failures from overwhelming an individual country's public finances. The costs of bank rescues bankrupted Ireland in 2010, and other governments have shoveled billions into rescuing banks.

"This will strengthen confidence and stability in the financial markets and help restore lending to the economy," said EU Commission President Jose Manuel Barroso.

The banking union is a response to the eurozone's troubles over government debt that began in 2009 and peaked in 2012. It's aimed more at preventing another crisis than at cleaning up the one just past.

The first part of the union is about supervision—taking regulation away from national supervisors, deemed to have been too lenient on their banks, and putting it at the EU level, under the aegis of the European Central Bank.

The second pillar is about setting up a fund that has the power to rescue or shut down banks.

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A deal on this fund, called the single resolution mechanism, had been the most difficult to reach because countries disagreed on how quickly the fund would raise money and on how decisions on banks would be made.

The two pillars would work together. Once the ECB says a bank is failing, the fund would be able to order the bank restructured, sold or closed down. Bank shareholders and creditors would be asked to take losses before taxpayers. Beyond that, the fund will have 55 billion euros ($76 billion) to put into banks, if needed. The money will be raised from levies on banks.

Once the system agreed on Thursday is in place, "no European taxpayer will ever have to pay for bankers' bad decisions again," said Hannes Swoboda, the leader of the parliament's socialist group.

Thursday's result is a compromise that differs from the original banking union idea put forward in 2012. The original proposals had a third pillar, Europe-wide deposit insurance. But that idea has stalled.

The European parliament had objected to a version agreed by governments in December. That version, deputies said, allowed for national governments and regulators to play too big a role in deciding what to do with a bank—undermining the basic idea of banking "union."

The deputies said they won changes to lessen the role of national officials. The fund will also be filled faster—over 8 years, not 10—and national contributions will be mingled into a common pot more quickly.

Corien Wortmann-Kool, a lead negotiator for the parliament, said that under the streamlined decision-making rules, troubled banks could be dealt with "within a weekend" instead of the protracted process before that often undermined credibility in the EU's financial system.

Negotiators had insisted on reaching a deal before the European elections in May, fearing that otherwise everything would have to be renegotiated once the new legislature is in place.

The 28 member states still have to officially approve the deal, but after Thursday's breakthrough that should be little more than a formality. The full legislature should back it at its April session, the last before the elections.

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